September 12, 2011

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 2011510416

You seek assurance from the staff of the Division of Investment Management (the “Staff”) that it will not recommend enforcement action to the Securities and Exchange Commission (the “Commission”) under certain recordkeeping requirements of Rule 204-2(a)(18)(i)(B) under the Investment Advisers Act of 1940 (the “Act”) against an investment adviser to a Covered Investment Pool1 if such adviser makes and keeps an alternative set of records as detailed in your letter and described below.

Rule 204-2(a)(18)(i)(B) (the “Government Plan Recordkeeping Rule”2), as relevant here, generally requires a registered investment adviser to make and keep a list or other record of all government entities which are or were investors in any Covered Investment Pool to which such adviser provides or has provided investment advisory services, as applicable, in the past five years, but not prior to September 13, 2010. The compliance date for this requirement is September 13, 2011.3

You state that a government entity may hold shares in a Covered Investment Pool through one or more omnibus accounts in such a way that such government entity is wholly unknown to the adviser, registered investment company or its transfer agent. You represent that this lack of transparency is impeding the ability of such advisers to comply with the Government Plan Recordkeeping Rule with regard to such accounts. In adopting the pay to play regime under the Act, the Commission recognized these transparency issues, but concluded that “it is reasonable to expect advisers to know the identity of the government entity when a registered fund they advise is part of a plan or program.”4 You acknowledge that larger government entities investing directly in a Covered Investment Pool ordinarily will be transparent to the adviser to such Covered Investment Pool or its affiliated persons. You also acknowledge that, due to the nature of certain qualified tuition programs established pursuant to Section 529 of the Internal Revenue Code of 1986 (“529 Plans”), an adviser also will know the identity of government entities sponsoring 529 Plans that offer one or more Covered Investment Pools as an investment option. You further acknowledge that an adviser generally will know the identity of government entities which the adviser targets in marketing. You state that advisers may not, however, have such transparency with respect to some larger and many smaller government entities that own shares in a Covered Investment Pool through one or more intermediaries.

As a result of the lack of transparency with respect to some government entities, you request assurance that the Staff will not recommend enforcement action to the Commission under the Government Plan Recordkeeping Rule against an adviser to a Covered Investment Pool if such adviser makes and keeps the alternative set of records described below. You acknowledge that under this approach, such an adviser would maintain in some ways a broader set of records than required by the Government Plan Recordkeeping Rule, and in other ways a more narrow set of records than those required under the rule. Specifically, you state that an investment adviser seeking to rely on the relief you request will make and keep a list or other record that includes:

Each government entity that invests in a Covered Investment Pool, where the account of such government entity can reasonably be identified as being held in the name of or for the benefit of the government entity on the records of the Covered Investment Pool or its transfer agent;5

Each government entity, the account of which was identified as that of a government entity — at or around the time of the initial investment — to the adviser or one of its client servicing employees,6 regulated persons7 or covered associates;8

Each government entity that sponsors or establishes a 529 Plan and has selected a specific Covered Investment Pool as an option to be offered by such 529 Plan; and

Each government entity that has been solicited to invest in a Covered Investment Pool either (i) by a covered associate or regulated person of the adviser; or (ii) by an intermediary or affiliate of the Covered Investment Pool if a covered associate, regulated person, or client servicing employee of the adviser participated in or was involved in such solicitation, regardless of whether such government entity invested in the Covered Investment Pool.

You assert that by maintaining these records, including a list of those government entities to which an adviser markets (whether successfully or not), the adviser’s records will likely capture most of the larger government entities and most other government entities whose investments are likely to create an incentive for the adviser to engage in pay to play conduct. You assert that maintenance of such a list, in conjunction with compliance with the other requirements of Rule 204-2(a)(18) and Rule 206(4)-5, will allow the Commission to achieve the purposes of the pay to play regime under the Act.

Based on the facts and representations in your letter, the Staff will not recommend enforcement action to the Commission under the Government Plan Recordkeeping Rule against an investment adviser to a Covered Investment Pool to which such adviser provides or has provided investment advisory services, as applicable, in the past five years, but not prior to September 13, 2010, if such adviser makes and keeps the records described above. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations might require a different conclusion.

This letter represents the Staff’s position on enforcement action only, and does not purport to express any legal conclusion on the questions presented. Our position is limited to the Government Plan Recordkeeping Rule and provides no relief from the other requirements under Rule 204-2 or the requirements under Rule 206(4)-5.

Kyle R. Ahlgren
Senior Counsel

1 For purposes of this letter, the term “Covered Investment Pool” means any investment company registered under the Investment Company Act of 1940 (the “Investment Company Act”) that is an investment option of a plan or program of a government entity. This usage intentionally excludes a category of company that is included in the definition of “covered investment pool” for purposes of Rule 204-2(a)(18)(i)(B), namely, any company that would be an investment company under section 3(a) of the Investment Company Act but for the exclusion provided from that definition by section 3(c)(1), section 3(c)(7) or section 3(c)(11) of the Investment Company Act. See Rule 206(4)-5(f)(3) under the Act. This category is excluded for purposes of this letter because you are not seeking no-action assurance with respect to the identification of government entities that invest in such companies.

2 For purposes of this letter, the term “Government Plan Recordkeeping Rule” refers to only that portion of Rule 204-2(a)(18)(i)(B) relating to Covered Investment Pools, and does not refer to the requirement in Rule 204-2(a)(18)(i)(B) to make and keep a list of all government entities to which the investment adviser provides or has provided investment advisory services. That portion of the rule is excluded for purposes of this letter because you are not seeking no-action assurance with respect to this requirement.

3 The Commission adopted the Government Plan Recordkeeping Rule in conjunction with the pay to play rule under the Act, Rule 206(4)-5. Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. 3043 (Jul. 1, 2010).

5 You represent that prospectively, information necessary to capture whether a shareholder is a government entity will be added to new account opening documents.

6 For purposes of this letter, a “client servicing employee” is a person who provides, on behalf of the adviser or the Covered Investment Pool, specialized client services to a government entity that invests in a Covered Investment Pool. Employees of the Covered Investment Pool or adviser who have incidental contact with a variety of shareholders or who service a variety of clients as part of their normal course of business without being assigned specific responsibility to service a particular accountholder (e.g., call center representatives) will not be considered “client servicing employees” for purposes of this letter. To the extent that the Covered Investment Pool or its adviser subcontracts its client servicing responsibilities, an adviser must obtain this information from its subcontractor.

7 For purposes of this letter, the term “regulated person” has the meaning assigned to it in Rule 206(4)-5(f)(9) under the Act.

8 You state that among other ways, an account may be identified to a covered associate, regulated person or client servicing employee of an adviser if: (i) the plan’s sponsor, agents, or participants disclose this information to such adviser’s covered associate, regulated person or client servicing employee; (ii) such adviser’s covered associate, regulated person or client servicing employee becomes aware that an affiliate of the Covered Investment Pool is providing services to such plan or government entity; or (iii) a third-party distributor directly informs such adviser’s covered associate, regulated person or client servicing employee.